Economic and GHG impacts of a US state-level carbon tax: the case of Hawai‘i

Abstract

ABSTRACT In the absence of sustained federal leadership to address climate change, many US states and cities have implemented their own climate policies. In 2018, the State of Hawai‘i set a goal of sequestering more greenhouse gases (GHGs) annually than emitted no later than 2045. This study builds a Computable General Equilibrium (CGE) model to understand how a state-level carbon tax in Hawai‘i could contribute to meeting this objective and how it would change household welfare for five different income groups. Against a baseline of existing federal and state GHG-related policies, we find that if Hawai‘i were to adopt a carbon tax at the level of the 2021 federally-specified social cost of carbon, Hawai‘i’s cumulative emissions would decline by an additional 10% from 2025 to 2045. Changes in group welfare depend heavily on whether carbon tax revenues are paid to households as equal-share dividends or used for increased state spending. If revenues are returned to households, the tax is progressive and benefits the average household in all five income groups. This is primarily because visitors pay the carbon tax while on a Hawai‘i vacation; their contributions amount to approximately one-third of collected revenues. Our findings are relevant to tourism-intensive regions, economies with demand-inelastic GHG-intensive export sectors, and island economies. Key policy insights A carbon tax for Hawai‘i set at the federal social cost of carbon – starting at $56/MtCO2e in 2025 and increasing to $79/MtCO2e in 2045 ($2020) – would reduce cumulative GHG emissions by 10% relative to the baseline from 2025 to 2045. When carbon tax revenues are paid as equal-share dividends to Hawai‘i households, the incidence of the carbon tax policy is progressive across income groups (by quintile). Carbon pricing with equal-share dividend payments results in net welfare gains for all household income groups, in part due to the large visitor contribution to carbon tax revenues. These findings are relevant to tourism-intensive regions, economies with demand-inelastic GHG-intensive export sectors, and island economies. State government carbon pricing programmes that recycle revenues towards households have the potential to mitigate GHGs and deliver broad benefits to households, which could speed regional and national climate action.